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U.S. Spending Cuts Would Goose Prices, Says Analyst

Canaccord Adams lowered its price assumptions for Henry Hub gas and WTI crude "to be more in line with our current view of weaker market conditions that are shaping up for 2007," wrote analyst Irene Haas in a Wednesday note.

The firm cut its Henry Hub gas forecast to $7.00/MMBtu for 2007 and $8.25 for 2008 from the previous estimate of $7.75 for both years. WTI crude was cut to $65/bbl for 2007 and 2008 from $68, the previous estimate for both years.

"With roughly a third of the heating season behind [us], the winter of 2006/2007 is nowhere near normal; heating degree days are 12% lower than the five-year average," wrote Haas. "If we were to assume normal weather for the remainder of this winter, we would still end up with storage levels at 1.5 to 1.6 Tcfe in early April of 2007. This storage overhang would be similar to levels experienced in April of 2006."

Haas believes that equilibrium will come back to gas markets, but not without some time and pain in the meantime. This year market bulls will not benefit from production declines in the Gulf of Mexico. Quite the contrary, "we are expecting 1 Bcf/d of new gas coming on line in Q3/07 from the deepwater Independence Hub in the eastern GOM," Haas wrote (see Daily GPI, Oct. 23, 2006).

Canadian producers have reacted to soft prices and have cut back on spending, but Haas noted that U.S. producers have yet to do so. "We believe that if U.S. producers start showing a more cautious stance, it would be a very bullish sign for the natural gas market."

For now, expect 1Q to be "extremely volatile" for both gas and oil prices, said Haas. Further price deterioration likely will lead to domestic spending cuts by producers. Further softening of oil prices could stir an OPEC response.

"For the next two months, we would recommend sitting on the sidelines and waiting for tangible signs such as capital expenditure cuts from the U.S. producers that would lead to natural gas production declines," Haas advised investors.

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